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Would you trust Artificial Intelligence (AI) to do your tax return?

More and more taxpayers and tax advisors are turning to AI for tax advice. Earlier this summer, the Taxpayer Advocate highlighted an informal review by the Washington Post that found “that two of the leading tax preparation companies’ chatbots provide inaccurate or irrelevant responses up to 50 percent of the time when initially asked 16 complex tax questions.” (Our Forbes informal review earlier this year found some hits and misses. (☆))

The Taxpayer Advocate has since warned that “taxpayers should not solely rely on AI-generated tax advice.”

The problems of AI are especially pronounced when it comes to highly complex, fact-intensive tax incentives such as the R&D tax credit and the Employee Retention Credit (ERC). While AI certainly has a role in tax preparation—especially repeatable tasks with predictable outcomes—it cannot replace the need for informed and knowledgeable tax experts.

Still, there’s no denying the role that technology has played in tax and accounting firms in recent years. Keeping up with that technology can be expensive.

Also expensive? Talent. The pool of available CPAs has been shrinking, as Baby Boomers (and soon Gen Xers, too) retire and Gen Zers turn their noses up at accounting, and in particular, the additional training and tests needed to become a licensed CPA. According to the American Institute of Certified Public Accountants’ 2023 Trends Report, 65,305 bachelor’s and master’s degrees were awarded in accounting in the 2021-2022 school year, down 18% from six years before. During the same period, the number of candidates passing the four test sections needed to be licensed as a CPA fell even more dramatically—just 18,847 successfully completed the test in 2022, down 32% from 2016. The result? There are fewer CPAs available–you might have noticed when scrambling to find a preparer this year.

Traditional CPA firms need new capital to invest in technology, lure new talent, and be buyers in the merger game. One solution? Private equity. Five of the largest 25 U.S. accounting firms, ranked by revenue, have taken private equity money. (☆) And experts believe that’s just the beginning.

Tax firms are keeping busy as taxpayers face a number of challenges–from complying with the Corporate Transparency Act (☆) to meeting filing deadlines. Mistakes are bound to be made. When things go wrong, taxpayers often want to make things right by filing an amended return to report the previously hidden income–but should they?

Sometimes, tax authorities give taxpayers a break. The Commonwealth of Massachusetts has announced (☆) an amnesty program for taxpayers to pay tax and interest owed in exchange for a waiver of penalties. Relief isn’t just for state taxpayers–the IRS also offers some options for coming clean.

The IRS has also announced it is opening a supplemental claim process (☆) to help third-party payers and their clients resolve incorrect ERC claims. Previously, it was unclear how a third-party payer, like a payroll company, who filed ERC claims for multiple employers could easily correct claims for some companies while allowing other claims to proceed. The new process offers a fix. Taxpayers who don’t qualify can still opt in to the ERC voluntary disclosure program or withdraw their application.

With the tax season almost a wrap, tax professionals are already looking ahead to conference season. The National Association of Estate Planners and Councils (NAEPC) will be holding its annual conference at the Disneyland Resort next month. While some may think that there’s nothing magical about death and taxes, many lessons can be gleaned from the well-known characters from The Happiest Place on Earth. In honor of the occasion, take a look at some timeless estate planning insights inspired by the classics.

Enjoy your weekend!

Kelly Phillips Erb (Senior Writer, Tax)

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Taxes From A To Z: R Is For Required Minimum Distributions

By law, you are required to withdraw funds from your IRA and other traditional retirement accounts each year after you reach age 73 (climbing to 75 in 2033). That amount is referred to as a required minimum distribution, or RMD. Typically, the amount you’re required to withdraw is figured each year by dividing your previous end-of-year account balance by your life expectancy. You’ll find your life expectancy factor in IRS Publication 590-B.

The “m” in RMD is important. You must withdraw at least the minimum amount. Skipping an RMD is an expensive mistake—the penalty is up to 25% of the amount by which the RMD for a year exceeds the amount distributed in that year. However, you can always withdraw more–there’s no such thing as “too much” when it comes to RMDs.

Keep in mind that your withdrawals are included in taxable income except for any amounts that were already taxed (your basis in the account, including any amounts that were funded by post-tax dollars) or amounts that are tax-free (like a distribution from Roth IRA).

The rules surrounding RMDs can be tricky–there are several exceptions and caveats.

For example, account owners in a workplace retirement plan like a 401(k) or profit-sharing plan can delay taking their RMDs until the year they retire, unless they’re a 5% owner of the business sponsoring the plan.

Another exception? You don’t have an RMD requirement from a Roth IRA until after the death of the owner. Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023–but for 2024 and later years, RMDs are no longer required from designated Roth accounts. You must still take RMDs from designated Roth accounts for 2023, including those with a required beginning date of April 1, 2024.

If you inherit a retirement account (☆), the rules are even more complicated thanks to the SECURE Act. Before the SECURE Act, if you inherited a retirement account, you could minimize the tax consequences by taking distributions over your own life expectancy. Under the new rules, if you inherit a retirement account, you can withdraw all the money as a lump sum or over ten years—which earned it the cleverly-named 10-year RMD Rule.

(Some beneficiaries are exempt from the 10-year RMD Rule, including surviving spouses and children under 21 of the IRA owner, disabled and chronically ill persons, and a person who isn’t more than 10 years younger than the account holder.)

For more information on retirement accounts and RMDs, check out these six new retirement rules that everyone should know about in 2024 and 2025.

As always, if you have questions, consult with a trusted financial or tax advisor.

Questions

This week, a taxpayer asks:

I am considering filing separately from my husband. The reason I’m thinking of doing this is I feel out of touch with our finances and what he is doing when he is filing the income tax (I see nothing). Long story short, I feel like I do not know what’s going on. Is filing separately a terrible idea?

No. In some circumstances–and it sounds like this is one of them–it can be a great idea.

Most married couples file jointly. That’s because, in many cases, if you choose to file as married filing separately, you will usually pay more tax—you lose the opportunity to claim some tax preference items. For example, you typically cannot take the student loan interest deduction, education credits, or the earned income credit if you file MFS.

However, there are a few scenarios where electing MFS status makes sense. Sometimes, it’s about the money–that’s not the case here. Other times, it can be about privacy or convenience.

If you maintain an independent financial life to the point where you don’t care/want to know what’s going on with your spouse’s finances, you should not file a joint tax return. The IRS expects you to review and understand your tax return before you sign it. If you don’t have a level of comfort in signing a joint return, don’t. If you sign the return, you become responsible for everything on the return, not just your income and expenses.

It’s worth noting that filing married separately requires coordination with your spouse—this isn’t a decision you make in a bubble. While you include only your own income, deductions, exemptions, and tax credits, you still have to include your spouse’s information, including their Social Security Number or Taxpayer ID. You also have to elect the same deduction option as your spouse—you must both opt to itemize or take the standard deduction.

Once you’ve filed MFJ, you cannot amend your return to MFS, though you can file a superseding return before the deadline. The opposite, however, does work: you can amend MFS returns to file as MFJ.

For more on filing separately, check out this earlier article.

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Do you have a tax question or matter that you think we should cover in the next newsletter? We’d love to help if we can. Check out our guidelines and submit a question here.

Statistics

The SALT (state and local taxes) deduction–which was capped under 2017 tax reform–has been a lightning rod in Congress with many Republican lawmakers wanting to eliminate the deduction entirely. Now, Congress is once again faced with a decision. Without congressional action, the cap will expire, and the full deduction will be restored on January 1, 2026.

Former President Donald Trump has vowed to end the SALT cap, a key provision of his signature 2017 Tax Cuts and Jobs Act. The proposal to repeal the $10,000 cap on the state and local tax deduction would cut 2025 taxes by an average of more than $140,000 for the highest-income 0.1% of families but provide little or no help to low- and middle-income households, according to a new Tax Policy Center analysis. Those making $430,000 or more would enjoy nearly three-quarters of the benefit of Trump’s proposal.

Compared to extending all the individual provisions of the TCJA, including the SALT cap itself, eliminating the cap would add about $1.2 trillion to the costs over the next decade, according to the Committee for a Responsible Federal Budget. The analysis suggests that repealing the cap without making other changes in tax law would be enormously expensive and a highly regressive windfall for the highest-income households.

A Deeper Dive

A recent case by the European Union’s top court finding that Apple must pay billions in back taxes to Ireland is still making news. (☆)

Specifically, folks want to know: How did Apple and Ireland respond to this loss, and what impact does this have on future state aid analysis? On the most recent episode of Tax Notes Talk, contributing editor Ryan Finley explains what state aid is–a unique feature of EU law that prohibits any policies or actions by member states that distort competition by selectively favoring one business or a subset of businesses–and what it means in the tax context.

The Apple investigation, he notes, was part of a whole wave of investigations that were launched after the LuxLeaks scandal in 2014 that basically targeted these various advance pricing agreements granted to large multinationals. The Apple investigation stood out because the amount of the alleged aid was so much greater–about €13 billion.

Apple wasn’t the only company fighting this battle. In late 2022, the Court of Justice made an important decision in a case involving Fiat. The Fiat case was distinct in the sense that the commission actually won at the General Court level. In another state aid case involving Amazon, and obviously in the case with Apple, the General Court almost always sided with the member state and/or the beneficiary against the commission.

These conflicts mean that we still don’t really understand how this holding sits with Fiat and another involving Amazon, and when one would apply and when the other would. That means this issue is far from resolved.

You can read a longer discussion of the case—and how it relates to older cases—here.

Tax Filings And Deadlines

📅 February 3, 2025. Due date for individuals and businesses affected by Hurricanes Beryl and Debby—more info here (☆) and here. (☆)

📅 February 3, 2025. Due date for individuals and businesses in South Dakota affected by severe storms, straight-line winds and flooding that began on June 16, 2024.

📅 February 3, 2025. Due date for individuals and businesses in Puerto Rico affected by Tropical Storm Ernesto.

📅 February 3, 2025. Due date for individuals and businesses in Connecticut and New York affected by severe storms and flooding from torrential rainfalls that began on August 18, 2024.

Tax Conferences And Events

📅 October 22-24, 2024. NATP Tax Season Updates. Virtual. Registration required.

📅 November 11-13, 2024. AICPA-CIMA 2024 Women’s Global Leadership Summit, Hyatt Regency Bellevue, Bellevue, WA. Virtual. Registration required.

📅 December 12-14, 2024. ABA Section of Tax, 2024 Criminal Tax Fraud and Tax Controversy Conference, Las Vegas, NV. Registration required.

📅 December 16-17, 2024. NYU 43rd Institute on State and Local Taxation, Westin New York at Times Square, New York, NY. CLE and CPE available. Registration required, virtual option available.

Trivia

Since I mentioned Disney characters earlier, how much would Disney’s Scrooge McDuck be worth today?

A. $88.4 million

B. $884 million

C. $8.84 billion

D. $88.4 billion

Find the answer at the bottom of this newsletter.

Positions And Guidance

The IRS has published the Internal Revenue Bulletin for September 30, 2024 (IRB 2024-40).

The IRS has released (☆) its annual update of special per diem rates for taxpayers to use in substantiating business expenses while traveling away from home.

Noteworthy

The IRS announced that Elizabeth Askey has been selected to serve as the Chief of the IRS Independent Office of Appeals (Appeals). Askey will set strategy and oversee the operations of Appeals, which resolves tax controversies between taxpayers and the IRS without litigation. Askey has served as the Deputy Chief of Appeals since December 2022 and has been acting as the Appeals Chief since April, responsible for approximately 1,750 Appeals employees nationwide.

Deloitte announced that it has received four awards at the 2024 International Tax Review (ITR) Americas Tax Awards, honoring its accomplishments delivering market-leading services and solutions. Deloitte was named “ESG Firm of the Year” and “Diversity Equity & Inclusion Firm of the Year,” becoming the first winner of the ESG award category in its inaugural year recognized by ITR. Additionally, Deloitte was named “Tax Technology Firm of the Year” in the Americas region for the seventh consecutive year, as well as “Tax Innovator of the Year” for the fourth consecutive year.

Alvarez & Marsal Tax, an affiliate of the global professional services firm Alvarez & Marsal (A&M), has appointed Michael Nissan as a senior advisor within its compensation and benefits practice. Nissan joins A&M Tax after a 40-year legal career at Weil, Gotshal & Manges LLP.

PKF O’Connor Davies announced that it has hired Donald Melody as a partner. Melody joins the organization’s Public Company and Financial Services practice areas with over two decades of experience conducting and supporting audits and providing consulting advice to broker-dealers, including prior service as a Branch Chief with the Securities and Exchange Commission (SEC) and an Inspections Leader for the Public Company Accounting Oversight Board (PCAOB).

Ropes & Gray announced that Julie Jones has been renewed for a second term as Chair of the 1,500-lawyer global firm. Neill Jakobe has been appointed Vice Chair for a five-year term beginning in January 2025. David Djaha, who has served as Managing Partner, is retiring in 2025 and will complete his five-year term in December 2024.

The Public Company Accounting Oversight Board (PCAOB) announced (☆) it has settled disciplinary orders sanctioning four audit firms for violating PCAOB rules and standards related to communications that firms are required to make to audit committees. The four firms are Tampa, Florida-based Accell Audit & Compliance, P.A., Canadian firms Crowe MacKay LLP and Grant Thornton LLP, and the Swiss arm of Ernst & Young AG. The PCAOB also sanctioned one audit firm, Halpern & Associates, LLC, of Connecticut, for violating PCAOB reporting rules.

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In Case You Missed It

Here’s what readers clicked through most often last week:

You can find the entire newsletter here.

Trivia Answer

The answer is (D) $88.4 billion.

Believe it or not, Forbes used to publish the Fictional 15–the net worth of the wealthiest characters from novels, movies, television and games, constructing portfolios based on those stories, and valuing them using real-world commodity and share prices.

In 2013, the last year that the list was published, Scrooge McDuck was valued at $65.4 billion (he kept most of his fortune in gold coins, piled high inside a Duckburg money bin). In today’s dollars, that would be worth around $88.4 billion. That would land him at #17 on today’s Forbes Billionaire list–just under Michael Dell (Dell Technologies) and above Gautam Adani.

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